Europe has been slowly but steadily gaining ground on the US, but now reaching areas of important downtrend line resistance which has held since mid-2015. This ratio should be watched carefully of EZU vs SPY, representing the European Monetary Union stocks vs the S&P, and if broken, would favor Europe continuing to gain ground after a severe 2+year period of underperformance. For now, this hasn't occurred, and this ratio lies up against what should be very solid resistance.

Well.. for all the excitement, anger, uproar over the Inauguration, there certainly wasn't that much overall volatility. Equities ended last week with just fractional gains. While some of the sector rotation gave a few clues, the underlying price action in the main US indices remains deadlocked in consolidation that has resulted in little net change since mid-December. The bullish sentiment we commented on last week seems to have contracted rather dramatically given the uncertainty of the Inauguration, and/or what might in store during Trump's first 100 days. Meanwhile equities have been undergoing their own mild sector rotation, with Technology, Materials and Industrials all starting to gain ground again, while Financials have been underperforming of late, despite some of the weakness in the Bond market. Bottom line, until there is some evidence of equities attempting to violate lows of this consolidation since mid-December, it's thought that the combination of increasing bearish sentiment coupled with stocks holding up near all-time highs should result in an UPSIDE breakout before any pullback gets underway.

Three key developments are important to highlight for this week: First, the acceleration lower in the US Dollar index lower, is important, and should boost emerging markets and commodities in the short run. Second, the breakout in Treasury yields higher above trendline resistance is also significant and should prove to be a source of strength for Financials, which have begun to underperform lately. (This hasn't just happened in the US, but globally). Third, Industrials have shown evidence of trying to break out. The Rail index surged last week on CSX's rally, and we saw both absolute and relative strength in the Industrials sector vs SPX that looks likely to continue.

As mentioned above, sentiment seems to have contracted very quickly, just after having widened out to optimistic levels in the last few weeks. The latest AAII poll shows a severe pullback in Bullish sentiment, while Bearish sentiment jumped to narrow the gap between Bulls and Bears to just a level of "5", down from over 30

Seasonality does seem to favor pullbacks in the month of February, and a sub-par period of performance following Inaugurations in post Election years, no matter what party is elected. For now though insufficient evidence of weakness is present to make for a compelling argument that this has begun, or should happen right away. If anything, a move initially to the upside looks more likely given the Industrials and Tech outperformance, coupled with the drop in bullish sentiment with ongoing Stock index resiliency.

SHORT-TERM/ INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION

Short-term Thoughts (3-5 days) : Bullish, and movement above 2270 should result in a quick move up to 2300 which represents serious resistance to the ongoing rally. For now, it's important to witness the consolidation breakout, which has come close on both sides in the last few weeks, but remains pointed higher, despite the near-term consolidation.

Intermediate-term Thoughts (2-3 months): Neutral- No change- Buy pullbacks for rallies into late Spring- Equities definitely appear like more of a poor risk/reward given the degree of lift since the Election that has carried prices well above the Bollinger band 2% Standard Deviation on weekly charts and up to the highs of the band on monthlies. Demark indicators now show TD Sequential and Combo sells on many longer-term timeframes, while the participation out of Technology and Healthcare has lacked the kind of surge seen in the Financials and Industrials, and is a work in progress. Overall, the longer-term structure for Equity indices certainly remains structurally bullish, despite the overbought conditions, but it's doubtful that February will prove bullish given the aforementioned factors. Yet, price alone is key to analyzing the true technical trend. For now, we haven't seen sufficient technical damage to make an intermediate-term bearish call on anything more than just a counter-trend basis, and some evidence of momentum starting to wane will be important on weekly/monthly basis to justify fading equities during this period of bullish seasonality into April.

SPX daily chart since the Fall shows the base-building that's been in effect since mid-December , as none of the recent pullback attempts have gained much traction and prices still lie within striking distance of mid-December high closes which occurred after the Election surge. Meanwhile, the trend from late December lows higher also remains intact, and has not been violated, even on several attempts last week. Prices brushed the 50% retracement of the late Dec-January rally while snapping back to avoid any real damage by the close. The key level for S&P futures remains near 2260 for short-term traders, and then 2249, near the late December lows. Meanwhile, on the upside, getting over 2270 initially and then 2276-7 is important. Until there's some evidence of technical damage, the trend remains structurally bullish, despite the recent sideways pattern. The combination of the huge drop in sentiment coupled with minimal technical damage and resilient prices likely still results in an upside breakout for SPX.

The hourly S&P futures chart really puts the recent consolidation into perspective, as prices have followed a pattern of lower and lower highs, while producing lows which are higher and higher since early January. This kind of consolidation typically follows a large move, so it's likely we do see an end to this neutral consolidation, given the recent narrowing in the range, and given the recent strengthening in both Industrials and Technology, it looks likely to be on the Upside, vs thinking prices break lower. Some evidence of strengthening in the Defensives likely should take place at/or near any type of market peak, and for now, given the uptick in rates, Utilities are more likely to trend back lower, along with other yield sensitive sectors.

Bloomberg World index shows a pattern which is largely structurally bullish, with a giant ascending triangle, which looks to have failed in its last few breakout attempts, the last coming early last week. Additional upside still looks likely as a way to resolve this pattern unless we see some real structural damage in seeing prices breach trendline support. This minor pullback globally in the last week "should" be buyable given the uptick in uncertainty, and lead back to new yearly highs. The All-time highs were made back in 2015, and remains in divergence with the all-time highs shown in US stocks.

Industrials are on the move again, thanks to the Rails strength and specifically CSX's surge last week. While the Rails remain just a minor piece of the puzzle, this technical breakout of the ongoing neutral range does seem important for the group, and also for the market, and along with Technology, should show further outperformance in the weeks ahead. Stocks like EMR, UNP, NSC remain some of the better stocks to favor within Industrials that still appear like good risk/rewards, along with Airlines like DAL, JBLU, AAL, and UAL.

Relatively speaking, this upswing in the Rails resulted in a big turn back higher in the relationship between XLI and SPX, which had peaked and turned down in early December after the huge one-month surge since the Election. This recent relative strength suggests that Industrials likely can continue its outperformance and show further relative strength vs the broader market in the short run. Given it's percentage in the S&P, along with Financials and Technology, participation out of this group seems likely in the days/weeks ahead and could serve as a tailwind for the broader market.

Sentiment has pulled back substantially in the last few weeks, and particularly in the time leading up to last week's Inauguration, as might be expected given the lack of certainty regarding policies or what might be accomplished during Trump's first 100 days. The AAII Bulls/Bears spread, which a few weeks ago had risen to 30, the highest level in over 1 year, has now pulled back to just low single digits, as Bears jumped to over 32% as of last Thursday 1/19, while Bulls also retreated to near 37. This contraction in sentiment might be understandable given that uncertainty is on the rise, while indices have not really shown much headway. For now, it's thought to be bullish that sentiment has pulled back with equities near all-time high territory, and could help this rally continue.

10-Year Treasury yields look to be on the move yet again, after stabilizing last week and turning up sharply, not unlike what's happening around the globe. While sentiment had started to turn more bearish on Treasuries into end of year 2016, we saw nearly a 40bp pullback in yields. Yet that looks to be proving short-lived as yields have pressed higher up above this downtrend from early December. Movement up to 2.53-5% looks likely which if exceeded, invites a test of 2.60% and above. Financials should begin to turn up this coming week given the resilience in rates, as it seemed to be Earnings that dragged down stocks like BK and KEY. For now, additional upside looks likely for yields, and technically it's right to expect at least a retest of former yield highs.

German Bund yields have pressed up lately at an even faster clip than Treasury yields, and as this weekly chart of German 10s shows, with rates on 10-year German bunds having closed at the highest levels since early last year. The trend from 2014 highs has been broken and should help yields continue to press up in the next few months, with intermediate-term resistance from 2011 highs found up just below 1%. It's important to present this to put the rally in 10year yields into perspective, which hasn't come close to showing the strength in besting recent yield highs, but yet looks likely in the weeks to come.

US Dollar index- Last week's late week pullback indicates that more weakness is likely before this move has run its course. Pullbacks to test 100 in the DXY or even below near 99.50 are likely before the Dollar index can stabilize. Movement into Commodity based stocks should continue for the near-term, and recent spikes in CCI index up to former highs that have consolidated a bit should lead to this being an excellent risk-reward long for further upside in the days/weeks ahead. While the Dollar index is likely to turn back higher in February into late Spring, for now the trend is down, and appears early to think is bottoming.

The Trend in Growth vs Value (SGX/SVX) looks to be bouncing of late after a very sharp decline into early January of this year. The intermediate-term trend was violated on last year's weakness, and now has given up about 50% of the entire uptrend since the 2013 lows. For the next 1-2 weeks, Growth could outperform Value as this ratio bounces, and SGX should fare better than SVX. However, rallies into February/March should be used to underweight Growth and think that Value should reassert its relative strength (ie. this ratio moves back lower in SGX/SVX) and outperform Growth.

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